Chapter 1

Economics Today, 16e (Miller)
Chapter 1 The Nature of Economics

1.1 The Power of Economic Analysis
1) The economic way of thinking will help you
A) make decisions in financing your home.
B) decide whether the U.S. government should encourage or discourage immigration.
C) make better decisions concerning your education.
D) all of the above
Answer: D
Diff: 1
Topic: 1.1 The Power of Economic Analysis
AACSB: Analytic skills
Question Status: Previous Edition
2) Economic analysis is used
A) only in economics classrooms.
B) only by business people.
C) only by policy makers.
D) in all decision making.
Answer: D
Diff: 1
3) Economic analysis is
A) a tool that can aid all decision making.
B) a tool that can be used in only macroeconomics.
C) a tool that can be used in only microeconomics.
D) an unnecessary complication to decision making.
Answer: A
Diff: 1
1
Copyright 2012 Pearson Education, Inc.
4) What is the purpose of knowing "the economic way of thinking"?

Answer: The economic way of thinking provides a framework for analyzing solutions to
economic problems. Since economic problems confront all of us much of the time, knowledge of
economics will enable one to arrive at better decisions, and enable one to evaluate many public
policy questions in a systematic manner.
Diff: 1
5) What does scarcity have to do with the fact that people must make choices?
Answer: Scarcity implies that people cannot have everything they want. This implies that ways
must be found to determine which of the many goods that people want will actually be produced.
Further, since any person cannot have everything he or she wants, the person must decide which
specific things to acquire. That is, the person must make choices.
Diff: 2
6) What is economics and what does it try to explain?
Answer: Economics is the study of how people allocate their limited resources in an attempt to
satisfy their unlimited wants. Therefore, it is the study of how people make choices. Economics
tries to explain real-world behavior, especially as it relates to interactions of people confronting
scarcity.
Diff: 1
1.2 Defining Economics
1) Economics is best defined as the
A) study of how people make choices to satisfy their wants.
B) study of individual self-interests.
C) study of how government can most efficiently raise funds by taxation.
D) process by which goods are sold in free markets.
Answer: A
Diff: 1
Topic: 1.2 Defining Economics
2
2) Economics can be described as the study of how people use ________ resources to satisfy
________ wants.
A) unlimited; unlimited
B) unlimited; limited
C) limited; unlimited
D) limited; limited
Answer: C
Diff: 1
3) Which statement most accurately defines economics?
A) Economics is the study of how people make money.
B) Economics is the study of how people make choices to satisfy their wants.
C) Economics is the study of values a society should choose.
D) Economics is the study of how to eliminate scarcity.
Answer: B
Diff: 1
4) In economic analysis, people's resources are
A) limited and their wants are unlimited.
B) unlimited and their wants are also unlimited.
C) limited and their wants are also limited.
D) unlimited and their wants are limited.
Answer: A
Diff: 1
5) In economics, items that are used to produce goods and services are known as
A) wants.
B) aggregates.
C) factors of need.
D) resources.
Answer: D
Diff: 1
3
6) In economics, all the items that people would consume if they had unlimited income are
known as
A) wants.
B) aggregates.
C) outputs.
D) needs.
Answer: A
Diff: 1
7) In economics, ________ are limited but ________ are unlimited.
A) wants; resources
B) resources; wants
C) money; ideas
D) ideas; money
Answer: B
Diff: 1
Question Status: New
8) Economics is the study of how
A) people make money.
B) preferences are determined.
C) psychology influences preferences..
D) people make choices.
Answer: D
Diff: 1
9) A fundamental aspect of economics is to
A) ensure that every firm makes a profit.
B) analyze how choices are made.
C) satisfy all our wants.
D) make sure that our resources will always be unlimited.
Answer: B
Diff: 1
4
10) Economics is the study of

A) how to get rich.
B) how people allocate their limited resources to satisfy their unlimited wants.
C) how people spend their income.
D) why people want certain goods and services rather than other goods and services.
Answer: B
Diff: 1
A) nonhuman phenomena.
B) the determinants of preferences.
C) scarce resources and unlimited wants.
D) the physical sciences.
Answer: C
Diff: 1
12) Economics deals with
A) how to profit from the stock market.
B) how to satisfy limited human wants.
C) how society allocates unlimited resources.
D) how individuals allocate scarce resources to satisfy unlimited human wants.
Answer: D
Diff: 1
Question Status: Revised
A) how to own as many resources as possible.
B) ceteris paribus.
C) the way people think rather than the way they act.
D) how people allocate their limited resources to satisfy their unlimited wants.
Answer: D
Diff: 1
5
14) Economic resources are

A) all the items that people would purchase if they had limited wants.
B) all the unlimited items that people would purchase with limited income.
C) items of value that are used to make other things that satisfy people's wants.
D) the total planned expenditures throughout the nation.
Answer: C
Diff: 1
15) Economics is concerned with choices
A) that involve the wants of individuals.
B) that involve the political goals of professional associations.
C) made by individuals only when they are consuming goods or services.
D) that involve making money.
Answer: A
Diff: 1
16) Economics is a social science that involves the study of how individuals
A) develop their tastes and preferences.
B) maximize their wealth.
C) define happiness.
D) choose among alternatives to satisfy their unlimited wants.
Answer: D
Diff: 1
17) Economics is a part of the
A) social sciences.
B) natural sciences.
C) biological sciences.
D) organizational sciences.
Answer: A
Diff: 1
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18) Wants are

A) another term for needs.
B) the things people would consume if they had unlimited incomes.
C) the things people consume with their income.
D) all the things people really need in order to live comfortably.
Answer: B
Diff: 1
19) The primary purpose of economics is to understand how people make
A) money.
B) goods and services.
C) choices.
D) a comfortable living.
Answer: C
Diff: 1
20) The primary objective of economics is
A) to learn how to create more resources.
B) to study how people make choices with limited resources.
C) to learn how to make the most profits with a given amount of resources.
D) to study why some people are never happy with the resources they have.
Answer: B
Diff: 1
21) The basic economic problem is a situation of
A) limited resources and unlimited wants.
B) both limited resources and limited wants.
C) limited incomes and unlimited choices.
D) unlimited incomes and limited choices.
Answer: A
Diff: 1
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22) Economics is the study of how people make

A) judgments.
B) investments.
C) money.
D) choices.
Answer: D
Diff: 1
23) Economics is a
A) hard science.
B) physical science.
C) natural science.
D) social science.
Answer: D
Diff: 1
24) Economics is a study of
A) how to make money in the stock market.
B) how to run a business successfully.
C) the allocation of scarce resources.
D) personal finance.
Answer: C
Diff: 1
A) the allocation of scarce resources to satisfy unlimited wants.
B) inflation and unemployment in society.
C) making money.
D) maximization of profits for a firm.
Answer: A
Diff: 1
8
26) Resources are

A) unlimited.
B) able to be replicated in large quantities.
C) what people would buy if their income was unlimited.
D) used to produce goods and services to satisfy people's wants.
Answer: D
Diff: 1
27) ________ are the things that are used to produce items that satisfy people's wants.
A) Concepts
B) Production possibilities curves
C) Resources
D) Costs
Answer: C
Diff: 2
28) Economics is most precisely defined as
A) a study of the mechanics of buying and selling on the stock exchange.
B) a study of how culture evolves in different geographic areas.
C) the same as the study of finance and management.
D) the study of how people make choices.
Answer: D
Diff: 1
29) Economics
A) is a social science.
B) is concerned with limited resources.
C) is concerned with unlimited wants.
D) All of the above are correct.
Answer: D
Diff: 1
9
30) Which of the following is NOT a focus of the study of economics?

A) how individual preferences are formed
B) unemployment
C) inflation
D) prices in particular markets
Answer: A
Diff: 1
31) Because resources are scarce relative to wants, the study of economics concerns
A) how money is important to people.
B) how individuals, businesses, and governments make choices.
C) how money is used to buy what people want.
D) None of the above are correct.
Answer: B
Diff: 2
32) In the definition of economics,
A) both resources and wants are limited.
B) both resources and wants are unlimited.
C) resources are limited and wants are unlimited.
D) resources are unlimited and wants are limited.
Answer: C
Diff: 1
33) Microeconomics is defined as that part of economic analysis that
A) studies the behavior of the economy as a whole.
B) includes the problems of inflation and unemployment.
C) studies individual decision making by households and firms.
D) concerns aggregate production and consumption.
Answer: C
Diff: 1
10
34) Macroeconomics is the study of

A) aggregate economic variables.
B) output in particular industries.
C) prices in particular industries.
D) all of the above.
Answer: A
Diff: 1
35) Microeconomics is the study of
A) the behavior of the economy as a whole.
B) how rising prices affect the level of employment in the economy.
C) how individuals and firms make decisions.
D) the effect that money has in the economic system.
Answer: C
Diff: 1
36) Macroeconomics is best defined by which of the following statements?
A) Macroeconomics is the study of how firms strive to maximize their profits.
B) Macroeconomics is the study of the behavior of the economy as a whole.
C) Macroeconomics is the study of individual economic units.
D) Macroeconomics is the study of how the prices of individual goods are determined.
Answer: B
Diff: 1
37) Macroeconomics deals with ________ while microeconomics deals with ________.
A) choices important to people; choices not important to people
B) economywide choices; choices of individuals
C) choices that involve money; choices that does not involve money
D) choices of rich people; choices of poor people
Answer: B
Diff: 2
11
38) Macroeconomics deals with

A) aggregates within the economy.
B) specific sectors within the economy.
C) the retail industry only.
D) decisions made by firms.
Answer: A
Diff: 2
39) Which of the following would most likely NOT be taught in a microeconomics course?
A) changes in prices of automobiles
B) the effects of a gas tax on gas purchases
C) the effects of an increase in wheat prices on farmers' behavior
D) the unemployment rate
Answer: D
Diff: 1
40) A macroeconomist would study
A) the price changes at K-Mart.
B) the cost problems at several airlines.
C) the economy's unemployment level.
D) none of the above.
Answer: C
Diff: 2
41) A microeconomist would study all of the following issues EXCEPT
A) the impact of a change in consumer income on the sales of corn.
B) the impact of a snowstorm on the sales of snow shovels.
C) the most efficient means for General Motors to produce an automobile.
D) the effect of a change in income taxes on the nation's rate of unemployment.
Answer: D
Diff: 1
12
42) The macroeconomist would most likely study

A) the effects of changing apple prices on the market for oranges.
B) the effects of an increase in wage rates on a woman's decision to enter the labor force.
C) the effects of a lower income tax rates on the nation's total production of goods and services.
D) the effect of increased union wages on the cost of producing automobiles.
Answer: C
Diff: 1
43) The impact of higher taxes would be examined by
A) a microeconomist.
B) a macroeconomist.
C) both a macroeconomist and a microeconomist.
D) neither a macroeconomist nor a microeconomist.
Answer: C
Diff: 2
44) One topic of study for a microeconomist would be the
A) causes of inflation.
B) causes of aggregate unemployment.
C) effects of a gasoline price increase on consumer behavior.
D) effects of an increase in government spending on overall economic activity.
Answer: C
Diff: 2
45) A friend wants to learn how the unemployment rate is calculated and how inflation is
measured. He asks you which economics course to take and you advise him to enroll in
A) macroeconomics.
B) microeconomics.
C) either micro- or macroeconomics. They both concentrate equally on those issues.
D) financial accounting because economics doesn't address those topics in its courses.
Answer: A
Diff: 1
13
46) Which of the following would likely be studied in a macroeconomics course?

A) the unemployment rate
B) total output for an economy
C) the inflation rate
D) all of the above
Answer: D
Diff: 1
47) Macroeconomics is concerned with
A) individual consumers.
B) government decision making concerning farm price supports.
C) aggregates.
D) the effects on a corporation of a strike by the United Auto Workers.
Answer: C
Diff: 1
48) Macroeconomics often relies on microeconomic analysis because
A) microeconomics is older than macroeconomics.
B) microeconomic theory can be tested and macroeconomic theory cannot be tested.
C) all aggregates are made up of individuals and firms.
D) the effects of macroeconomic subjects such as inflation and unemployment are independent
of individual consumers and firms.
Answer: C
Diff: 2
49) Microeconomics is concerned with studying which of the following?
A) the determinants of national unemployment
B) the effects of monetary policy
C) the study of individual markets
D) all of the above
Answer: C
Diff: 1
14
50) Microeconomics is concerned with the study of

A) the effects of inflation.
B) the effects of government spending.
C) the effects on individual producers of higher wages paid to workers.
D) aggregates.
Answer: C
Diff: 2
51) Microeconomics focuses on
A) individual decision makers within the economy.
B) the large parts of the economy.
C) changes in national income.
D) satisfying the needs of the economy.
Answer: A
Diff: 1
52) Macroeconomics is concerned with
A) individual business firms.
B) specific industries.
C) individual consumers.
D) a nation's entire economy.
Answer: D
Diff: 1
53) Microeconomics examines the
A) total household expenditures.
B) behavior of the economy as a whole.
C) aggregate business spending.
D) decision making undertaken by individual households.
Answer: D
Diff: 1
15
54) Macroeconomics is concerned with studying the

A) behavior of individual decision makers.
B) behavior of the economy as a whole.
C) prices of specific companies' stocks.
D) wants of individuals.
Answer: B
Diff: 1
55) Macroeconomics would be concerned with
A) implications of changes in unemployment and inflation.
B) the effects on individual consumers of changes in the price of gasoline for a business.
C) the effects of a tax on beer.
D) the effects of wage increases on steel manufacturers.
Answer: A
Diff: 2
56) The study of an individual's choice about what type of computer to buy is a subject of
A) macroeconomics.
B) microeconomics.
C) an aggregate concept.
D) not a concern for economic analysis.
Answer: B
Diff: 2
57) The study of the aggregate economic variables is
A) macroeconomics.
B) microeconomics.
C) positive economics.
D) normative economics.
Answer: A
Diff: 1
16
58) Another word for "aggregate" is

A) government.
B) partial.
C) public.
D) total.
Answer: D
Diff: 1
59) The distinction between microeconomics and macroeconomics is
A) clearly drawn, and there is no overlap between them.
B) determined by economists in a clear and concise manner.
C) narrowly drawn, and microeconomic analysis often relies on macroeconomic tools.
D) often blurred because aggregates are made up of individuals and firms.
Answer: D
Diff: 2
60) Modern economists are increasingly using microeconomic analysis in macroeconomics
because
A) microeconomic theory is more scientific.
B) aggregate outcomes stem from decisions made by individuals, business firms and
government.
C) macroeconomic subjects such as inflation affect all individuals.
D) macroeconomics is older and more outdated.
Answer: B
Diff: 2
61) Which of the following is NOT studied in microeconomics?
A) the effect of an increase in gasoline taxes on the purchase of gasoline
B) the impact of an increase in the unemployment rate on economic production
C) the impact of firms' collective hiring choices on the aggregate unemployment rate
D) the impact of higher fuel prices on the cost of airline tickets
Answer: B
Diff: 2
17
62) All of the following are examples of macroeconomic problems EXCEPT

A) inflationary pressures caused by an increase in the cost of petroleum.
B) unemployment caused by a fall off in the level of residential construction.
C) a decline in the rate of overall economic growth.
D) consumers deciding to buy more fish and less beef because of concerns about a healthier diet.
Answer: D
Diff: 1
63) Macroeconomics is concerned primarily with
A) positive economics.
B) production and prices in particular markets.
C) aggregate economic variables.
D) normative issues.
Answer: C
Diff: 1
64) Microeconomics studies
A) decisions made by individual consumers and firms.
B) the changes in economic theory brought about by real-world events.
C) how small changes in the unemployment rate can have far-reaching effects.
D) how small changes in the money supply can have far-reaching effects.
Answer: A
Diff: 1
65) Which of the following terms identifies something that macroeconomists would study but
that microeconomists would NOT?
A) incentives
B) resources
C) rationality
D) aggregates
Answer: D
Diff: 2
18
66) Which of the following is a characteristic or focus of economics?

A) allocation of limited resources in an effort to satisfy potentially unlimited wants
B) positive economic analysis
C) empirical analysis
D) all of the above
Answer: D
Diff: 1
67) Which of the following would likely be considered as falling into the domain of
microeconomics?
A) the U.S. unemployment rate
B) the Gross Domestic Product
C) the price of apples
D) the effects of fiscal policy on the U.S. economy
Answer: C
Diff: 2
68) Macroeconomics might study which of the following?
A) the causes of domestic unemployment
B) decision making undertaken by firms
C) decision making undertaken by households
D) determinants of the prices of rare goods (e.g., diamonds)
Answer: A
Diff: 2
69) Which of the following is NOT a characteristic or focus of microeconomics?
A) normative analysis.
B) analysis of aggregate economic variables.
C) empirical analysis.
D) empirical analysis
Answer: B
Diff: 1
19
70) Which of the following is a microeconomic concern?

A) the rate of economic growth in the United States
B) the current unemployment rate in the United States
C) consumer behavior
D) national output of the United States
Answer: C
Diff: 1
71) Which of the following is a macroeconomic concern?
A) the unemployment rate in a specific industry
B) the national output of the United States
C) wage levels in specific industries
D) the operation of an individual firm
Answer: B
Diff: 1
72) The study of how a particular firm might choose to maximize its profits would fall into what
type of analysis?
A) macroeconomics
B) microeconomics
C) labor economics
D) aggregate economics
Answer: B
Diff: 2
73) What type of economics would most typically deal with aggregates?
A) macroeconomics
B) microeconomics
C) labor economics
D) environmental economics
Answer: A
Diff: 1
20
74) Which of the following is a microeconomic topic?

A) the unemployment rate of the United States economy as a whole
B) the rate at which prices increase in Brazil
C) the advertising strategy of a particular company
D) the increase in the national income of the United States over the past three months
Answer: C
Diff: 2
75) Which of the following topics is a macroeconomic subject?
A) a proposed merger between two companies
B) the level of Christmas sales at a particular department store
C) the unemployment rate of the United States economy as a whole
D) the advertising strategy of a particular automobile firm
Answer: C
Diff: 1
76) Which of the following is an aggregate?
A) the number of shoes in one man's closet
B) the bushels of apples one farmer sells
C) the price of a particular textbook
D) the total production of all goods and services
Answer: D
Diff: 2
77) All of the following are aspects of microeconomics EXCEPT
A) monopolies.
B) a firm maximizing profit.
C) a worker choosing one job over another.
D) the average level of prices of all goods and services produced in a country in a year.
Answer: D
Diff: 2
21
78) The impact of an increase in the gasoline tax on SUV sales is

A) a macroeconomics topic because it deals with taxes.
B) a microeconomics topic because it deals with one industry.
C) not an economic issue, but rather a political issue.
D) insignificant.
Answer: B
Diff: 2
79) Which of the following would most likely be part of the study of microeconomics?
A) how General Motors makes decisions regarding its production goals
B) national income
C) the total economic output of our domestic economy
D) overall price stability in the United States
Answer: A
Diff: 1
80) All of the following are aspects of macroeconomics EXCEPT
A) the U.S. unemployment rate.
B) the production decisions of a pharmaceutical firm.
C) the budget deficit of the United States.
D) foreign trade.
Answer: B
Diff: 1
81) Individual decision making by consumers and producers is the focus of
A) macroeconomics.
B) microeconomics.
C) aggregate measures.
D) any economic model.
Answer: B
Diff: 1
22
82) Aggregate measures are

A) anything to do with economics.
B) a total measure of a variable across the economy.
C) used only in microeconomics.
D) determined by the Bureau of Labor Statistics.
Answer: B
Diff: 2
83) Microeconomics is the study of
A) aggregate measures of the economy.
B) foreign policy economic issues.
C) federal budget details.
D) individual decision making.
Answer: D
Diff: 1
84) An example of a microeconomic decision is a situation in which
A) the Federal Reserve considers how much to increase the money supply during the coming
month in an effort to constrain the rate of inflation.
B) Congress and the president seek to reach a compromise on how much to increase government
spending in an effort to influence national expenditures.
C) a firm evaluates how much to reduce the price of its product in an effort to influence sales and
boost its profits.
D) the U.S. Treasury contemplates buying foreign currencies in an effort to influence exchange
rates with an aim to boosting demand for U.S. goods and services.
Answer: C
Diff: 1
85) Explain the study of economics.
Answer: Economics is the study of how people allocate their limited resources in an attempt to
satisfy their unlimited wants. Because of this contrast between limited resources and unlimited
wants, economics is the study of how people make choices.
Diff: 1
23
86) Is inflation a macroeconomic or a microeconomic question? Why?

Answer: Inflation is a macroeconomic question because it deals with an economy-wide
phenomenon. The price increase of a specific product, such as gasoline, would be a
microeconomic matter. Since inflation deals with prices in the economy as a whole, it is a
macroeconomic concern.
Diff: 2
87) Distinguish between macroeconomics and microeconomics.
Answer: Macroeconomics is concerned with the behavior of the economy as a whole, while
microeconomics is concerned with the choices of individual decision-makers, such as households
and firms. Macroeconomics deals with aggregates, such as the total output of the economy or
unemployment, while microeconomics deals with how many hours a person chooses to work or
how many people a firm decides to hire.
Diff: 1
1.3 The Three Basic Economic Questions and Two Opposing Answers
1) An economic system is
A) the universe of all resources.
B) a way to create new resources.
C) a mechanism to allocate scarce resources.
D) an organization that generates profits.
Answer: C
Diff: 1
Topic: 1.3 The Three Basic Economic Questions and Two Opposing Answers
2) The way that a society uses to allocate resources to satisfy human wants is called
A) an economic system.
B) an assumption.
C) realism.
D) a physical science.
Answer: A
Diff: 1
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3) The issues that an economic system attempts to solve include:

A) what to produce.
B) how to produce items.
C) for whom items are produced.
Answer: D
Diff: 1
4) Which of the following is NOT one of the basic questions that an economic system attempts to
answer?
A) How to eliminate choices?
B) What to produce?
C) How much will goods and services be produced?
D) For whom will goods and services be produced?
Answer: A
Diff: 1
5) What is the type of economic system that relies on one central authority to make economic
decisions?
A) Free market
B) Price system
C) Command and control
D) Mixed economic system
Answer: C
Diff: 1
6) What is the type of mechanism that answers the basic economic questions through a
decentralized decision making process?
A) Market system
B) Dictatorship
Answer: A
Diff: 1
25
7) Central planning is a key characteristic of which economic system?

A) Free market
B) Price system
Answer: C
Diff: 1
8) Under a pure price system, the decision of resource allocation is made by
A) the head of the government.
B) a queen or king.
C) individuals who own the resources.
D) no one.
Answer: C
Diff: 1
9) In a market system, the what, how and for whom questions in economics are determined by
A) those who are not in the market.
B) buyers and sellers together.
C) the central authority.
D) no one.
Answer: B
Diff: 1
10) In a market system, ________ provide signals about whether resources are relatively scarce
or abundant.
A) prices
B) economists
C) government officials
D) scientists and engineers
Answer: A
Diff: 1
26
11) The United States is best known as a

A) pure price system.
B) dictatorship.
C) command and control system.
D) mixed economic system.
Answer: D
Diff: 1
12) A mixed economic system is best described an economy with a mix of
A) state and federal governments.
B) domestic and foreign buyers.
C) free markets and government control.
D) for-profit organizations and not-for-profit organizations.
Answer: C
Diff: 1
13) Distinguish between a command-and-control economic system and a price system.
Answer: In a command-and-control economic system, economic decisions about resource
allocation are made by a central authority, such as a central government or a king or queen.
Under command and control, this central authority decides what items will be produced, how
will the items be produced, and who will obtain those items. In a price or market system, the
what, how and for whom issues are determined via decentralized decision making among buyers
and sellers in the market.
Diff: 1
1.4 The Economic Approach: Systematic Decisions
1) In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam
Smith argued that individuals
A) always tend to act in an altruistic manner.
B) always consider the impact of their actions on the welfare of others.
C) are motivated by self-interest.
D) are generally not concerned with economic questions.
Answer: C
Diff: 1
Topic: 1.4 The Economic Approach: Systematic Decisions
27
2) Economists assume that people are motivated by

A) benevolence.
B) altruism.
C) greed.
D) rational self-interest.
Answer: D
Diff: 1
3) One major assumption of economics is that people
A) act as if they systematically pursue self-interest.
B) behave randomly without any predictable pattern.
C) are sometimes rational and sometimes irrational.
D) always pursue the interests of others.
Answer: A
Diff: 1
4) If people act as if they systematically pursue their own self-interest, then they will most likely
A) respond irrationally to any incentive.
B) respond to a given incentive in a random manner.
C) respond predictably to a given incentive.
D) not respond to any incentive.
Answer: C
Diff: 2
5) When studying individuals' economic behavior, economists assume that
A) individuals understand the rationale for all their actions.
B) individuals act as if they were rational.
C) only educated people act as if they were rational.
D) self-interest is of limited relevance in predicting an individual's actions.
Answer: B
Diff: 1
28
6) The assumption that people do not intentionally make decisions that would leave them worse
off is known as
A) the rationality assumption.
B) the microeconomic assumption.
C) the ceteris paribus assumption.
D) the normative assumption.
Answer: A
Diff: 1
7) When the text refers to rational self-interest, it means
A) your looking out for what is best for you as an individual.
B) your focus on your own contributions to society.
C) behavior that makes society better off.
D) behavior that helps your employer earn higher profits.
Answer: A
Diff: 2
8) In economics, the concept that individuals are motivated by self-interest and respond
predictably to opportunities for gain is known as
A) rational self-interest.
B) altruism.
C) sufficiency.
D) empiricism.
Answer: A
Diff: 1
9) Economists assume people behave rationally, which means that people
A) never make a mistake.
B) do not intentionally make decisions that make themselves worse off.
C) have the necessary information to always make correct decisions.
D) always understand the consequences of their decisions.
Answer: B
Diff: 2
29
10) Sara looks into her closet and discovers a pair of like-new shoes she no longer wears because
they give her blisters. From the economist's perspective, was Sara behaving rationally when she
bought those shoes?
A) No. If any of a person's decisions have poor results, that person is irrational.
B) Yes, as long as Sara didn't intentionally purchase blister-causing shoes.
C) No. The rationality assumption states that rational people never make mistakes.
D) It's not clear because psychology, not economics, deals with the rationality assumption.
Answer: B
Diff: 2
11) Do economists analyze people's thought processes or do they look at what people actually
do?
A) Economists focus only on people's thought processes.
B) Economists focus on what people do, not their thought processes.
C) An economist's focus is about half-and-half between actions and thought processes.
D) Macroeconomists focus on thought processes while microeconomists focus on actions.
Answer: B
Diff: 1
12) When people donate money to a charity, they behave
A) rationally if the act gives them satisfaction.
B) irrationally because the act does not benefit anyone.
C) in an unpredictable manner because the act involves no incentive.
D) in a way that only makes themselves worse off.
Answer: A
Diff: 2
13) The potential rewards that are available to an individual if a particular activity is undertaken
are known as
A) premiums.
B) gifts.
C) incentives.
D) intrinsic values.
Answer: C
Diff: 1
30
14) Father says, "Earn a B-average on your next report card and I'll help you buy a car." An
economist would say that this parent is providing his child a(n)
A) study disincentive.
B) reason to slack off and not worry about her grades.
C) bribe.
D) incentive.
Answer: D
Diff: 2
15) Some pet owners are using an "invisible fence" to keep their animals from straying. Every
time the animal steps over the edge of the property, it gets a mild shock. A social scientist would
call the shock
A) a bribe.
B) a reward.
C) a disincentive.
D) a normative incentive.
Answer: C
Diff: 2
16) Which of the following is true of incentives?
A) Different people are motivated by different incentives.
B) Money is the only measure of incentives.
C) All of the people in a particular nation are motivated by the same incentives.
D) In economics, people are assumed to respond to disincentives instead of incentives.
Answer: A
Diff: 1
17) Economists assume people are motivated by
A) unlimited resources.
B) pride.
C) self-interest.
D) social justice.
Answer: C
Diff: 1
31
18) Self-interest relates to

A) only monetary objectives.
B) both monetary and nonmonetary objectives.
C) the ceteris paribus assumption.
D) normative economic analysis and not positive economic analysis.
Answer: B
Diff: 2
19) Economists assume people behave
A) instinctively.
B) rationally.
C) irrationally.
D) greedily.
Answer: B
Diff: 1
20) Which of the following is always true of rational behavior?
A) It always entails pursuing one's own best interest.
B) It always yields the best possible outcome for all individuals.
C) It never involves the pursuit of greedy self-interest.
D) It never involves taking into account the interests of others.
Answer: A
Diff: 1
21) John has an economics test tomorrow. He must study and has planned the rest of his day so
that he can fit some study time in. He has decided to go to the gym and then study for several
hours. Which of the following statements is true?
A) John did not use the economic way of thinking because his decision on how to allocate his
time did not involve money.
B) John's decision on how to allocate his time is inconsistent with the rationality assumption
since he has decided to go to the gym.
C) John's decision on how to allocate his time is consistent with the rationality assumption since
the decision is intended to make him better off.
D) John's decision does not involve his pursuit of self-interest.
Answer: C
Diff: 3
32
22) People behave rationally when they

A) follow the advice of government leaders.
B) never have regrets about their decisions.
C) make decisions they think will make themselves better off.
D) make decisions solely based on financial outcomes.
Answer: C
Diff: 2
23) Which of the following is a true statement about the economic assumption of rationality?
A) Individuals who are rational necessarily ignore the interests of others.
B) Individuals generally act as though they are rational.
C) Individual behavior may be irrational but group behavior is always rational.
D) People make decisions as if they are omniscient.
Answer: B
Diff: 1
24) A decision made by a rational person
A) is intended to make the person worse off.
B) would always make the person wealthier.
C) is identical to a decision that would be made by any other person facing the same choices.
D) is intended to make the person better off.
Answer: D
Diff: 2
25) The assumption that individuals will not intentionally make decisions that will leave them
worse off is known as
A) microeconomic analysis.
B) macroeconomic analysis.
C) a model or theory.
D) the rationality assumption.
Answer: D
Diff: 2
33
26) The rationality assumption says that

A) people do not intentionally make decisions that would leave them worse off.
B) people never make decisions that would leave them worse off.
C) people do not respond to incentives since incentives require scarce resources.
D) all economic analysis must be normative.
Answer: A
Diff: 2
27) Jose is rational if he
A) does not intentionally make decisions that would leave him worse off.
B) never makes a mistake in his life.
C) only responds to rewards that involve money.
D) always uses a model or mathematical formula to help him make a decision.
Answer: A
Diff: 2
28) A possible rational reason why older people, on average, show less interest in learning how
to use new technologies is because
A) older people are not as smart as (today's) young people.
B) they are acting irrationally.
C) they have fewer years to gain a return from learning how to use new technologies.
D) the financial cost for older people is greater than the cost to younger people.
Answer: C
Diff: 1
29) Incentives are
A) potential rewards available if a particular activity is undertaken.
B) ineffective as a device to get people to behave in a certain fashion.
C) inappropriate ways to obtain a certain kind of behavior.
D) useless when people behave rationally.
Answer: A
Diff: 1
34
30) Which of the following would NOT provide an incentive to reduce the amount of beef
consumed?
A) An increase in the price of beef
B) A subsidy to buyers of beef
C) A decrease in the price of chicken
D) A ban on beef sales by the Food and Drug Administration
Answer: A
Diff: 3
31) People respond to incentives
A) by ignoring negative incentives and responding to positive incentives only.
B) only when they are irrational.
C) by calculating their individual costs and benefits and determining which is greater.
D) when they have low incomes.
Answer: C
Diff: 2
32) The threat of a large fine for failure to pay income taxes is an example of
A) the excessive power of the Internal Revenue Service.
B) the ineffectiveness of incentives to get people to pay their taxes.
C) a negative incentive to get all people to pay taxes.
D) people failing to consider all the benefits the government provides them.
Answer: C
Diff: 2
33) A politician says that the government should tax behavior they want less of and subsidize
behavior they want more of. This is an example of
A) cynical behavior in modern democracies.
B) failing to consider the alternatives available to the government.
C) a concern that people are not rational when they make decisions.
D) using incentives to alter behavior.
Answer: D
Diff: 2
35
34) Which of the following ways to recruit soldiers utilizes incentives?

A) a draft
B) universal service
C) higher salaries
D) longer lengths of service
Answer: C
Diff: 2
35) Self-interest
A) implies that a person must try to increase wealth at all times.
B) implies that people will not give away wealth.
C) is consistent with many goals that people pursue, including betterment of others.
D) applies only to people in market settings.
Answer: C
Diff: 2
36) Self-interest
A) relates strictly to material well-being, such as a person's stock of wealth at a point in time.
B) is measured entirely based on an individual's income, whether earned from labor or inherited.
C) is inconsistent with economic analysis, which suggests that self-interest is irrational.
D) can involve any action that makes a person feel better off, such as charitable contributions.
Answer: D
Diff: 2
37) Shelley's grandmother gave her a sweater for her birthday, but Shelley wanted a DVD. This
implies that
A) Shelley's grandmother is not acting out of self-interest because she knows that Shelley really
wanted a DVD.
B) Shelley's grandmother is acting out of self-interest because she wanted to give Shelley
something useful.
C) it is in Shelley's self-interest to refuse to wear the sweater.
D) Shelley should exchange the sweater for a DVD.
Answer: B
Diff: 3
36
38) Charitable donations to the Red Cross

A) can be explained by the rational ignorance theory.
B) can be explained by the rational self-interest theory.
C) cannot be explained by the rational self-interest theory.
D) prove that there is no scarcity in the United States.
Answer: B
Diff: 2
39) A five-cent deposit on beer bottles
A) provides a positive incentive because it rewards people for recycling.
B) provides a negative incentive because it punishes people who do not recycle.
C) is an irrational policy, because it fails to take into account incentives.
D) is an irrational policy, because it fails to take into account self-interest.
Answer: A
Diff: 3
40) If a teacher tells a student that those who attend the study session typically score higher on
the final exam,
A) the student has a positive incentive to attend the study session because she may get a higher
grade.
B) the student has a negative incentive to attend the study session because she will be punished if
she does not go.
C) the student has no greater incentive to attend because there is no guarantee she will get a
higher grade on the exam.
D) a "C" student will be making an irrational decision if she decides to skip the study session
since she has plenty of time to go.
Answer: A
Diff: 2
37
41) Consider the case of a teacher who tells students that those who miss more than three classes
for any reason will automatically receive a lower grade.
A) This is an example of a positive incentive for students to attend class.
B) This is an example of a negative incentive for students to attend class.
C) The teacher is assuming that students are irrational, and she must force them to attend class.
D) Students who miss more than three classes are irrational.
Answer: B
Diff: 2
42) If the government offers to reduce your property taxes by 10 percent if you install solar
heating for your home, this would be an example of
A) police power.
B) incentives.
C) disincentives.
D) ceteris paribus.
Answer: B
Diff: 2
43) Economists assume that people are motivated by
A) a desire to please others.
B) the interests of the community at large.
C) self-interest.
D) morally correct behavior.
Answer: C
Diff: 1
44) When we say that an individual behaves according to "rational self-interest," we mean that
this individual
A) is motivated by greed.
B) will always buy the most fashionable items available.
C) will always buy the cheapest products available on the market.
D) is making choices that he or she believes will leave him or her better off.
Answer: D
Diff: 2
38
45) Rational behavior for an economist means that individuals

A) are motivated by self-interest.
B) never change their minds.
C) always make positive choices.
D) are self-sacrificing.
Answer: A
Diff: 1
46) According to economists, when two people make exactly the opposite decision,
A) one of them is acting irrationally.
B) each person evaluates the situation according to his/her individual self-interest.
C) one of them is acting out of spite.
D) one of them should compromise.
Answer: B
Diff: 1
47) It is assumed in economics that people make decisions based upon
A) altruism.
B) rational self-interest.
C) tradition.
D) governmental persuasion.
Answer: B
Diff: 1
48) An incentive is a
A) need.
B) want.
C) reward for desired behavior.
D) resource.
Answer: C
Diff: 1
39
49) The assumption that individuals do NOT intentionally make decisions that would leave them
worse off is referred to as
A) the premium assumption.
B) the law of comparative advantage.
C) the rationality assumption.
D) the law of demand.
Answer: C
Diff: 1
50) The author of the book An Inquiry into the Nature and Causes of the Wealth of Nations is
A) Thorstein Veblen.
B) Adam Smith.
C) Milton Friedman.
D) Alan Greenspan.
Answer: B
Diff: 1
51) Rational self-interest means
A) always increasing your wealth.
B) pursuing what makes you better off.
C) pursuing activities that maximize income.
D) always pursuing activities that are consistent with your faith.
Answer: B
Diff: 1
52) The rationality assumption states that
A) all actions taken by consumers are based on what is good for society.
B) people make decisions regardless of how the outcome will affect them.
C) people make decisions to buy only those goods that they need rather than goods that they
want.
D) people do not intentionally make decisions that would leave them worse off.
Answer: D
Diff: 1
40
53) Economic theory predicts that people make choices in a manner that
A) makes them well liked by others.
B) makes them better off.
C) reflects the fact that resources are unlimited.
D) shows that they do not respond to monetary incentives.
Answer: B
Diff: 1
54) How could Adam Smith's comment about the butcher, the brewer, and the baker be
accurately rephrased in modern terms?
A) The butcher, the brewer, and the baker give us our dinner because they want to be well liked
in the community.
B) The butcher, the brewer, and the baker give us our dinner because they will be sued if they
don't do so.
C) The butcher, the brewer, and the baker give us our dinner because they each earn a living by
doing so.
D) The butcher, the brewer, and the baker give us our dinner because they view doing so as a
public service.
Answer: C
Diff: 2
55) According to economic theory, how do people make decisions?
A) They make decisions in the same manner as their parents did.
B) They make decisions by looking at what others have done in the same situation and then
doing the opposite.
C) They make decisions by looking at what others have done in the same situation and then
doing the same.
D) They make decisions based on their own self-interest.
Answer: D
Diff: 2
41
56) Underlying economic theory is the idea that

A) people respond only to negative incentives, not to positive ones.
B) choices are affected by both positive and negative incentives.
C) value judgments do not play a role in the economic decisions people make.
D) money is the only incentive that matters.
Answer: B
Diff: 2
57) High gasoline prices give people all of the following incentives EXCEPT
A) to drive less.
B) to car pool.
C) to buy a hybrid car.
D) to take vacations that require driving more miles.
Answer: D
Diff: 2
58) The idea that people will not consciously make decisions that make them worse off is known
as
A) rationality assumption.
B) the decision duality.
C) Adam Smith's doctrine.
D) incentive assumption.
Answer: A
Diff: 1
59) Explain what economists mean when they apply the rationality assumption.
Answer: The rationality assumption means that people do not intentionally make themselves
worse off. It does not deal with the interior reasoning of a person or the psychology of a person.
Instead, rationality applies to the way people actually behave in a world of scarcity.
Diff: 1
42
60) "Economists assume people are selfish." Do you agree with this statement or not? Explain.
Answer: Economists do not assume people are selfish, although clearly some people are. Selfinterest does not necessarily mean selfishness. People have many goals, some of which may be
self-centered and some of which may be more altruistic. Charity is consistent with self-interested
behavior.
Diff: 2
61) "Rational, self-interested people would never end up worse off by any decision they make.
Obviously, people often make mistakes or have regrets. Therefore, people do not act rationally or
out of self-interest." Do you agree with these statements? Why or why not?
Answer: No. People may make mistakes because they often do not have enough information to
make the best decision or because they are wrong about the effect of their actions. When they
make a decision, given their circumstances and the information they have, they make the best
choice for themselves.
Diff: 3
AACSB: Reflective thinking skills
62) What assumption about human motivation is made in economics? Explain.
Answer: Economists assume that people act as if motivated by self-interest. People respond
predictably to opportunities for gain. That is, people look out for their own self-interest and do so
in a rational manner.
Diff: 1
63) What is meant by the term "incentives," and why are they important?
Answer: Incentives are rewards for engaging in particular activities. Much of human behavior
can be explained in terms of incentives. For example, grades in school are an incentive, as are
paychecks for work. Incentives are important because rational human beings seeking to promote
their own welfare will respond to incentives in predictable ways.
Diff: 1
43
64) During the Middle Ages, heretics were often burned at the stake. Were the heretics violating
the assumption of rational self-interest? Explain.
Answer: For someone today, or even many people living at that time, it would seem the heretics'
behavior was irrational and not in their own self interest. But, in their own eyes, they may have
been acting rationally and with self-interest. Given their goals, dying rather than recanting their
views was in their self-interest, especially if they believed such a death guaranteed them eternal
life. They believed they would have been worse off had they recanted their views. The benefit of
dying for their cause was greater to them than the cost of dying.
Diff: 3
1.5 Economics as a Science
1) Another term for "economic models" is
A) economic designs.
B) economic theories.
C) economic science.
D) economic maps.
Answer: B
Diff: 1
Topic: 1.5 Economics as a Science
2) A simplified representation of the real world that is used to explain economic phenomena is
a(n)
A) map.
B) model.
C) assumption.
D) implication.
Answer: B
Diff: 1
3) Economics is an empirical science, which means that economists
A) must use laboratory experiments to test their theories.
B) evaluate a model or theory by whether its assumptions are consistent with the real world.
C) try to prove their models are true by referring to logic.
D) look for evidence to determine whether the model is useful or not.
Answer: D
Diff: 1
44
4) Both the social sciences and the natural sciences employ ________ to help them understand
the world around them.
A) models
B) designs
C) traditional thinking
D) implications
Answer: A
Diff: 1
5) Which is NOT true about the use of economic models?
A) Economic models are simplified representations of the real world.
B) Economists sometimes use laboratory experiments to test their theories.
C) Economists use what has already happened in the real world to test their theories.
D) Economists are employed to explain economic phenomena but are never used to predict what
might happen next.
Answer: D
Diff: 2
6) Which of the following statements is FALSE?
A) Economists empirically test their models.
B) Economic models are not used to forecast.
C) An economic model should capture only the essential relationships that are sufficient to
analyze the particular problem being studied.
D) Economic models relate to behavior rather than to individual thought processes.
Answer: B
Diff: 1
7) Economists develop models to
A) capture every detail of the real world.
B) make their arguments more realistic.
C) justify the assumptions they make about people's behavior.
D) help us understand economic phenomena in the real world.
Answer: D
Diff: 2
45
8) Which of the following statements concerning economic models is FALSE?

A) Economic models must provide usable predictions.
B) Economic models are based on pure fact and no assumptions.
C) Economic models are tested empirically.
D) Economic models relate to how people behave.
Answer: B
Diff: 2
9) Which of the following statements about economic models is true?
A) Economic models are not empirically testable.
B) The predictive power of models is not important.
C) Economic models are designed so that every detail of the real world can be analyzed.
D) Every economic model is based on a set of assumptions.
Answer: D
Diff: 1
10) Economic models
A) are used to explain how people think.
B) are used to explain how people behave.
C) are essential representations of the real world.
D) are never used for making economic projections or predictions.
Answer: B
Diff: 1
11) One reason why economists often use models in their analysis is that
A) a model helps us to understand, explain, and predict economic phenomena in the real world.
B) a model accurately pictures every detail of the real world economy.
C) a model relates to individual thought processes rather than behavior.
D) it is relatively easy to perfectly specify a model.
Answer: A
Diff: 1
46
12) An economic model should capture

A) the essential relationships that help to analyze the problem.
B) all possible variables that apply to the problem.
C) only social value related variables.
Answer: A
Diff: 2
13) One problem with constructing a perfectly complete realistic economic model is that
A) it would be too simplistic to have any value.
B) it would be far too complicated to analyze.
C) politicians see little value in such a model.
D) None of the above is true.
Answer: B
Diff: 2
14) Which of the following statements is true?
A) No economic model captures every detail that affects a problem.
B) Economic models always make accurate predictions about behaviors.
C) Economic models must fully reflect reality.
D) Economic models use economists' opinions with no use of data.
Answer: A
Diff: 2
15) A map is an example of a model because a map
A) realistically describes an area.
B) is always as complex as space will permit.
C) is two-dimensional.
D) is a simplified representation of reality.
Answer: D
Diff: 2
47
16) Holding all variables constant but one and assessing the impact of the one variable that has
changed is an example of using
A) the ceteris paribus assumption.
B) an economic model based on unrealistic assumptions.
C) a flawed economic model.
D) an untestable proposition.
Answer: A
Diff: 1
17) The term ceteris paribus means
A) the greatest good for all.
B) the study of scarcity and choice.
C) all other things remaining constant or equal.
D) value-free and testable.
Answer: C
Diff: 1
18) In order to study how changing price affects consumer decisions, we must assume all other
factors, such as income and the prices of other goods are constant. This assumption is best know
as
A) rationality.
B) ceteris paribus.
C) normative economics.
D) behavioral economics.
Answer: B
Diff: 1
48
19) Which of the following is an example of an application of the ceteris paribus assumption?
A) An analysis of how price changes affect how much of a good people will purchase when all
other factors are held constant
B) An analysis of how people purchase more goods when prices decline and income increases
C) After reading an article on the dangers of high-fat diets, an individual buys less red meat when
prices increase
D) An analysis of how worker productivity increases when a firm invests in new machines and
training programs
Answer: A
Diff: 2
20) Ceteris paribus means
A) making all the necessary changes.
B) other things constant.
C) for certain parameters.
D) let the buyer beware.
Answer: B
Diff: 1
21) The ceteris paribus assumption is important in economics because
A) all empirical data are equal.
B) it would be impossible to relate the effects of changes in one variable on another without
holding some variables constant.
C) economic data move very slowly over time and so they can always be considered constant.
D) models are always complex and require as many variables as possible.
Answer: B
Diff: 2
22) The assumption that "other things are constant" is also known as the
A) ceteris paribus assumption.
B) rational self-interest assumption.
C) distinguishing characteristic of economics as a science.
D) relationships assumption.
Answer: A
Diff: 1
49
23) Mary says she plans to return to college next semester assuming her car keeps running,
tuition fees don't go up, and her daycare provider continues to be dependable. An economist
would say that Mary plans to return to college next semester, ________.
A) caveat emptor
B) ceteris paribus
C) laissez faire
D) ipso facto
Answer: B
Diff: 2
24) Professor's economics students are constructing models for how gasoline prices change.
Maria's model has very realistic assumptions and is quite complex. Anna's model is less
complicated and less realistic. Maria's model correctly predicts gas price increases 5% of the
time. Anna's model predicts correctly 15% of the time. On the basis of usefulness or "goodness,"
Professor will give which student's model the higher grade and why?
A) Maria's model gets the higher grade because it is more complex.
B) Anna's model gets the higher grade because it is simpler.
C) Maria's model gets the higher grade because it is more realistic.
D) Anna's model gets the higher grade because it predicts accurately more often.
Answer: D
Diff: 2
25) Why is economics called an empirical science?
A) because economics has been used to both create and destroy empires
B) because economics uses impressions to evaluate the usefulness of its models
C) because economics relies on real-world data to determine the usefulness of a model
D) because economics utilizes intuition rather than data to evaluate a model's worth
Answer: C
Diff: 2
50
26) An appropriate test of the effectiveness of an economic model is

A) the number of variables contained within the model.
B) the model's ability to predict future economic activity.
C) the number of economists who have worked on the model.
D) the number of assumptions which the economist has made.
Answer: B
Diff: 1
27) A good economic model
A) utilizes only the two most important factors to analyze the problem under consideration.
B) generates statements that are incapable of refutation.
C) represents every detail of the real world.
D) yields usable predictions and implications for the real world.
Answer: D
Diff: 2
28) The usefulness of a model is determined by
A) whether it helps to explain or predict real world phenomena.
B) whether it possesses realistic assumptions.
C) how well it uses the ceteris paribus assumption.
D) how many of the possible relationships that exist are included in the model.
Answer: A
Diff: 1
29) The use of data in economic models is important because
A) the model's predictive value rests on supportive evidence from real-world data.
B) the models are always complex in nature.
C) models must analyze every possible angle of the problem.
D) social problems analyzed by economists require long streams of data.
Answer: A
Diff: 2
51
30) If two competing models are offered to explain a certain economic phenomenon, the better
model is the one
A) that is the newest since newer models are better than old models.
B) with the fewest unrealistic assumptions.
C) that more often predicts with most accuracy.
D) that is not subject to empirical verification.
Answer: C
Diff: 2
31) To be useful, a model must
A) predict accurately all of the time.
B) predict more accurately than other models that have been developed.
C) have assumptions that have been verified by empirical testing.
D) explain and predict the behavior of every individual.
Answer: B
Diff: 2
32) Economics is called an empirical science because
A) economists study real-world evidence to test their models.
B) economists use assumptions in their models.
C) economic models have no predictive power.
D) economic analysis is only useful in a capitalistic society.
Answer: A
Diff: 1
33) Which of these social sciences deals most with models of behavior rather than with thought
processes?
A) Psychology
B) Sociology
C) Psychiatry
D) Economics
Answer: D
Diff: 1
52
34) Which of the following best describes how economists test the empirical predictions of
economic models?
A) Economists survey individuals to learn about how people think through decisions about how
much to purchase or to produce.
B) Economists collect and analyze real-world observations of people's actions to discern if those
actions accord with theories' predictions.
C) Based on theories about thought processes, economists seek to determine which thought
processes predominate in determining how a person decides what actions to take.
D) Recognizing that people always do what they say they will do, economists rely exclusively on
information gleaned from polls and surveys conducted by poll takers and market researchers.
Answer: B
Diff: 2
35) When constructing economic models, economists are more concerned with
A) what people say than what they do.
B) what people think than what they say.
C) what people do than what they say.
D) what people say than what they do or think.
Answer: C
Diff: 1
36) Behavioral economics is an approach to the study of consumer behavior
A) that emphasizes psychological limitations and complications that potentially interfere with
rational decision making.
B) that emphasizes the capabilities of individuals to succeed in attaining all their unlimited wants
utilizing limited resources.
C) that, in contrast to standard approaches in economics, utilizes the ceteris paribus assumption.
D) that, in contrast to standard approaches in economics, relies on real-world data to evaluate the
usefulness of economic models.
Answer: A
Diff: 1
53
37) The hypothesis that people are nearly, but not fully rational, cannot possibly fully examine
every available choice, and utilize simple rules of thumb in making decisions is known as the
A) irrationality hypothesis.
B) ceteris paribus hypothesis.
C) individual aggregation hypothesis.
D) bounded rationality hypothesis.
Answer: D
Diff: 1
38) According to the bounded rationality hypothesis, an individual confronting a large number of
complicated choices is most likely to respond by
A) using a simple rule of thumb to choose among a subset of easiest-to-evaluate options.
B) using the ceteris paribus assumption to assist in simplifying and examining each of the
possible options.
C) utilizing readily available empirical evidence to assist in evaluating every option.
D) assessing every available choice by developing sophisticated theories regarding each option.
Answer: A
Diff: 1
39) An economic theory is also known as an economic
A) model or principle.
B) design.
C) miracle.
D) assumption.
Answer: A
Diff: 1
40) Economic models are
A) always based on laboratory methods similar to natural sciences.
B) a simplified representations of the real world.
C) used only in microeconomic analysis by households.
D) used only in macroeconomic analysis by business firms.
Answer: B
Diff: 1
54
41) Economic models are NOT used to

A) explain economic phenomena.
B) predict economic phenomena.
C) understand economic phenomena.
D) describe all economic phenomena in minute detail.
Answer: D
Diff: 1
42) To test their theories, economists usually have to
A) set up careful laboratory experiments with all variables controlled.
B) first examine theory and what has happened in the past in the real world.
C) use only models that have a proven record of success.
D) anticipate every factor with 100 percent accuracy.
Answer: B
Diff: 3
43) A difference between biology and economics is that
A) economists use models and biologists use theories.
B) biologists often use laboratory methods and economists do less often.
C) economics explains events while biology predict events.
D) biologists use the scientific method while economists do not.
Answer: B
Diff: 2
44) Models must
A) be able to yield useable predictions.
B) be totally realistic in every detail.
C) be a complete reproduction of the real world.
D) include every relationship that exists.
Answer: A
Diff: 1
55
45) A good economic model

A) cannot be refuted.
B) describes the real world completely and in detail.
C) captures the essential relationships of the problem under consideration.
D) captures all relationships about the problem under consideration.
Answer: C
Diff: 2
46) Which of the following statements is NOT true?
A) Economics is a social science.
B) Economics is an empirical science.
C) Economics does not use theories.
D) Economics is the study of how people allocate their limited resources to satisfy their
unlimited wants.
Answer: C
Diff: 1
47) A characteristic of a good model is that
A) its predictions can be tested using real-world data.
B) it is useful for making irrefutable predictions.
C) it applies to all situations.
D) it predicts perfectly.
Answer: A
Diff: 2
48) In an economic model, assumptions
A) must be applicable to all real-world situations.
B) must be eliminated before being used to make sure the model is realistic.
C) are not important in determining the usefulness of the model.
D) define the set of circumstances in which the model is most likely to be applicable in the real
world.
Answer: D
Diff: 1
56
49) A model is used to explain economic behavior. Therefore,

A) the assumptions must be complex while the model itself is simple.
B) the model must be complex.
C) the model must be simple.
D) the model can be either simple or complex so long as it explains economic behavior.
Answer: D
Diff: 2
50) "Ceteris paribus" assumption means
A) the role of rational self-interest in the economy.
B) that nothing else changes except the variables under consideration.
C) relying on real-world data in evaluating the usefulness of a model.
D) analysis that is strictly limited to making either purely descriptive statements or scientific
predictions.
Answer: B
Diff: 2
51) If economists are making the assumption that business people try to maximize profits, the
best way to determine whether this assumption is useful or not is to
A) see whether it generates accurate predictions about the choices of business people.
B) ask business people whether it is true or not.
C) find out whether U.S. businesses are more profitable than European businesses.
D) take a survey of people and see if they agree with this assumption.
Answer: A
Diff: 3
52) The assumption that nothing changes except the factor being studied is
A) the ceteris paribus assumption.
B) the rationality assumption.
C) positive economic analysis.
D) normative economic analysis.
Answer: A
Diff: 1
57
53) "Ceteris paribus" means

A) "invisible hand."
B) "other things constant."
C) "making all the necessary changes."
D) "individual."
Answer: B
Diff: 1
54) A scientist who is studying earthquakes includes the impact of wind when performing some
tests of damages to structures. This is an example of
A) failing to understand how to do scientific methodology.
B) irrational behavior in noneconomic situations.
C) accounting for every possible phenomena that may effect the problem under examination.
D) failing to hold all other things constant.
Answer: D
Diff: 2
55) Economics is an empirical science, which means that economists
A) look at evidence to see whether or not the model is applicable.
B) test their models by utilizing unknown variables.
C) do only laboratory experiments.
D) refuse to test their models since the usefulness of a model is determined by whether it is
logical or not.
Answer: A
Diff: 2
56) Which expression below matches most closely the way economists go about testing their
models?
A) "Consistency is the hobgoblin of small minds."
B) "Seeing the results is the only way to know if you are right."
C) "A bird in the hand is worth two in the bush."
D) "In the long run we are all dead."
Answer: B
Diff: 2
58
57) Economic models relate to

A) people's choices.
B) how people think about something.
C) group opinions.
D) the reasons people give for donating to charity.
Answer: A
Diff: 1
58) A poll conducted by a national firm finds that most Americans say they care more about
safety when buying a car than about fuel efficiency. As a result, a car maker produces a car with
many safety features, but it doesn't sell well. This behavior
A) contradicts economic theory because the people didn't do what they said they would do.
B) contradicts economic theory because it is irrational not to purchase safer cars.
C) does not contradict economic theory because economists focus on what people do rather than
on what they say.
D) does not contradict economic theory because economic theory only relates to prices and not
to features such as safety.
Answer: C
Diff: 3
59) According to proponents of behavioral economics, because every possible choice cannot be
considered, an individual will tend to fall back on methods of making decisions that are simpler
than trying to sort through every single possibility, known as
A) rules of thumb.
B) rational options.
C) irrational choices.
D) normative decisions.
Answer: A
Diff: 1
59
60) Which of the following is NOT an alleged "unrealistic" assumption that proponents of
behavioral economics suggest are commonly utilized in traditional economic models based on
the rationality assumption?
A) unbounded selfishness
B) unbounded rationality
C) unbounded will power
D) unbounded resources
Answer: D
Diff: 1
61) If psychological limitations and other complications cause people to be unable to examine
and think through every possible choice available to them and rely instead on rules of thumb,
then these individuals exhibit
A) unbounded rationality.
B) normative thinking.
C) bounded rationality.
D) positive thinking.
Answer: C
Diff: 1
62) A theory or a model
A) is a simplified, abstract view of reality.
B) is based on each economist's value judgments.
C) is a detailed analysis of what ought to be.
D) captures all aspects of the real world.
Answer: A
Diff: 1
A) "all variables are independent."
B) "other things being equal."
C) "some assumptions must be accepted without proof."
D) "some theories are not rational."
Answer: B
Diff: 1
60
64) The ceteris paribus assumption means

A) favors are returned in kind.
B) this is the proof of the matter.
C) from many, one.
D) other things are equal.
Answer: D
Diff: 2
65) In building a model the assumption that allows economists to study only the factors being
analyzed is the
A) rationality assumption.
B) ceteris paribus assumption.
C) the self-interest assumption.
D) the scarcity assumption.
Answer: B
Diff: 2
A) other variables are held constant.
B) almost certainly.
C) only if everything works just right.
D) perhaps.
Answer: A
Diff: 1
67) In constructing models, economists
A) include all independent variables.
B) include all available information.
C) attempt to duplicate the real world.
D) make simplifying assumptions.
Answer: D
Diff: 1
61
68) In building a model to analyze economic situations, one of the important assumptions is
A) ceteris paribus.
B) scarcity.
C) conversion abstraction.
D) cognitive dissonance.
Answer: A
Diff: 1
69) Assumptions are necessary to
A) make economics a social science.
B) define a set of circumstances where a model is most likely to apply.
C) define the relationship between wants and resources under all circumstances.
D) define the specific cause and effect relationship that is being explained by social sciences.
Answer: B
Diff: 2
A) all men are created equal.
B) wage parity between men and women is a worthy goal.
C) there are an infinite number of factors affecting each human decision and they change all the
time.
D) economists isolate one or two factors that change when analyzing human decisions.
Answer: D
Diff: 1
71) Economic models are used to
A) simplify reality to predict outcomes.
B) exactly replicate reality.
C) predict all possible outcomes of a study.
D) determine the thoughts of individuals.
Answer: A
Diff: 2
62
72) Economic models

A) should be designed so as to capture every detail or interrelationship that exists.
B) are simplified representations of the real world.
C) must employ the use of laboratory methods.
D) All of the above are correct.
Answer: B
Diff: 1
73) Economics may be referred to as a(n) ________ science, meaning that data is looked at to
see whether assertions are correct.
A) empirical
B) exact
C) assumptive
D) soft
Answer: A
Diff: 2
74) The term ceteris paribus is an economic assumption that means
A) let the buyer beware.
B) common sense is reality.
C) the detail is in the interrelationship.
D) other things being equal.
Answer: D
Diff: 1
75) The value of a model is determined by
A) the usefulness of its predictions in the real world.
B) the extent of the profit earned by applying it.
C) the realism of its assumptions.
D) the model's attention to real world details.
Answer: A
Diff: 2
63
76) Assumptions in models tend to make

A) the model predict what the scientist wants the results to be.
B) the model more complex.
C) the model more applicable to specific circumstances.
D) the model always predict the future accurately.
Answer: C
Diff: 2
77) What would lead an economist to conclude that Theory A is superior to Theory B?
A) Theory A predicts real-world events better than does Theory B.
B) The assumptions underlying Theory A are more realistic than are the assumptions underlying
Theory B.
C) Theory A explains how people think, whereas Theory B only explains what they do.
D) Theory A is based on the assumption that an individual typically cannot determine what is in
his or her own best interest, whereas Theory B assumes that each person knows what is in his or
her own best interest and acts accordingly.
Answer: A
Diff: 3
78) Why do economists test their hypotheses?
A) to see whether people are motivated by self-interest
B) to see whether their models predict the choices people will make
C) to determine whether government policies have effectively achieved their goals
D) to learn what people are thinking when they make the choices they do
Answer: B
Diff: 3
79) Which of the expressions below best describes the aim of economic theory?
A) to predict how people think about money
B) to understand why money motivates some people more than others
C) to predict the choices people will make
D) to learn what we can do to prevent people from having unrealistic wants
Answer: C
Diff: 3
64
80) Based on your understanding of your roommate's preferences, you predict that he will select
the spaghetti for his lunch at the cafeteria, but instead he chooses the gyros. How do you describe
this event in terms of economic theory?
A) Your roommate is irrational.
B) Your roommate does not know what is in his own best interests.
C) You roommate does not know his own preferences as well as you do.
D) You constructed a model that made a prediction, and the prediction was refuted.
Answer: D
Diff: 3
81) Which of the following statements about economic models is true?
A) A good economic model is complex.
B) A good model does not rely on any assumptions.
C) Every model is based on a set of assumptions.
D) Economic models are designed to explain what people need.
Answer: C
Diff: 2
82) The way economists understand, explain and predict economic phenomena is to
A) form a theory.
B) consider real-world data only in rare cases.
C) utilize normative economics.
D) aggregate data and examine only the big picture.
Answer: A
Diff: 2
83) By using the ceteris paribus assumption in conjunction with a model, economists can
A) suspend the rationality assumption.
B) avoid having their model depend on any additional assumptions.
C) hold certain factors constant.
D) be sure that the model will predict correctly.
Answer: C
Diff: 2
65
84) What is meant by saying that economics is an empirical science?

A) Economic theories do not need to be tested because they are based on true assumptions.
B) Economic theories cannot be tested because there is no means of measuring economic
variables with adequate precision.
C) Economic theories cannot be tested because economic variables change too quickly.
D) Economic theories will be tested by seeing how well they correspond to real-world
phenomena.
Answer: D
Diff: 2
85) The combination of psychology and economics to determine individual decision making is
known as
A) behavioral economics.
B) pyschomics.
C) the rule of thumb.
D) positive analysis.
Answer: A
Diff: 2
86) The idea of bounded rationality is used to address all of the following characteristics
EXCEPT
A) unbounded selfishness.
B) unbounded knowledge.
C) unbounded willpower.
D) unbounded rationality.
Answer: A
Diff: 2
87) What does it mean to say economics is an empirical science, and how is this related to the
question of deciding on the usefulness of a model?
Answer: Economists examine evidence to test whether a model is useful or not. That is, realworld data are studied to see if they conform to the predictions of the model. A model is useful if
it generates testable predictions and implications for the real world. A model that predicts better
is generally considered a better model.
Diff: 2
66
88) "To be useful, a model must be completely realistic." Evaluate.

Answer: This statement is incorrect. To be useful, a model must capture key real-world elements
but cannot account for every detail of the real world. The model should capture the essential
relationships that enable us to analyze the problem with which we are concerned. A model is
useful so long as it sheds light on the central forces at work.
Diff: 2
89) Suppose a survey is taken concerning car safety. According to the survey, people strongly
desire safer cars and indicate they are willing to pay substantially more for safer cars. Using this
information, one auto firm adds numerous safety features to its car, raising the price by several
thousand dollars. Sales drop sharply, and the firm loses profits. What went wrong?
Answer: The automaker was relying on what people say rather than on what they do. An
economic model would have tried to predict whether the expected gains from driving safer cars
would have been great enough for consumers to pay the higher price. Economic models are
models of behavior and not models about how people think or whether people's views directly
affect their actions. Also, they did not account for other factors
Diff: 3
1.6 Positive versus Normative Economics
1) Normative economic statements
A) violate the law of ceteris paribus.
B) contain value judgments.
C) are usually irrational.
D) are easily testable.
Answer: B
Diff: 1
Topic: 1.6 Positive versus Normative Economics
AACSB: Ethical understanding and reasoning abilities
2) Normative economics involves
A) a statement of fact.
B) a statement of "what should be."
C) a statement of "what is."
D) a statement that is purely descriptive.
Answer: B
Diff: 1
67
3) "If A occurs then B will follow" is a

A) positive statement.
B) normative statement.
C) non-testable statement.
D) statement lacking in logic.
Answer: A
Diff: 1
4) "If the United States enters a war in the Middle East, the economy will go into a recession" is
an example of
A) a positive statement.
B) an easy to prove statement.
C) a normative statement.
D) a factual statement.
Answer: A
Diff: 1
5) Which of the following is an example of a positive economic statement?
A) In order to reduce the budget deficit, tax rates should be increased.
B) In order to increase employment, the minimum wage should be decreased.
C) If payroll taxes are raised, then the Social Security crisis will be resolved.
D) If gas prices fall, consumers should purchase more gas.
Answer: C
Diff: 1
6) "No individual should have less than $20,000 income in the United States in 2010" is an
example of
A) a normative statement.
B) a positive statement.
C) an illogical and refutable statement.
D) a truism.
Answer: A
Diff: 1
68
7) Which of the following is a normative statement?

A) An increase in consumer income will lead to increased sales of beef.
B) A decrease in the rate of unemployment will lead to upward pressure on consumer prices.
C) An increase in the income tax will cause a greater reduction in savings than an increase in the
sales tax.
D) An economy with high unemployment can be worse off than an economy with high inflation.
Answer: D
Diff: 1
8) Which of the following is a positive economic statement?
A) No individual should live in poverty.
B) The rate of unemployment of young African-Americans exceeds that of white Americans.
C) Unemployment is a more serious problem than inflation.
D) Economic considerations are less relevant than ethical issues in deciding national policy.
Answer: B
Diff: 1
9) "All Americans should have access to health care" is an example of
A) a positive statement.
B) a microeconomic argument.
C) a factual statement.
D) a normative statement.
Answer: D
Diff: 1
10) When a U.S. Senator tells a campaign crowd that "High inflation rates are a much more
serious economic problem than high unemployment rates," it is an example of
B) an empirically proven fact.
C) a positive statement.
D) a microeconomic argument.
Answer: A
Diff: 1
69
11) Which of the following statements is a positive economic statement?

A) The number of families living in poverty in the United States is too high.
B) One in every five children in the United States is living in poverty.
C) Government programs to help the poor are just making problems worse.
D) Increases in poverty rates signify a deterioration of the U.S. economy.
Answer: B
Diff: 1
12) Which of the following statements is a positive economic statement?
A) The Congress should pass the president's tax package.
B) Tax rebates always give too much favor to rich people.
C) The President's budget included an increase in unemployment insurance payments.
D) none of the above
Answer: C
Diff: 2
13) Which of the following statements is a normative as opposed to a positive economic
statement?
A) Consumer spending generates more jobs.
B) If the price of gasoline goes up, people buy less.
C) Labor unions should be allowed to organize in every industry.
D) Government intervention in markets is common in many countries.
Answer: C
Diff: 1
14) Whenever statements embodying values are made, we enter the realm of
B) normative economics.
C) microeconomics.
D) macroeconomics.
Answer: B
Diff: 1
70
15) Positive economic analysis is said to be

A) true.
B) right.
C) value-laden.
D) objective.
Answer: D
Diff: 1
16) Positive statements can contain
A) opinions and conditions.
B) facts and predictions.
C) a mixture of facts and opinions.
D) logical arguments mixed with statements of opinion.
Answer: B
Diff: 1
17) Normative economic analysis involves
A) positive analysis.
B) value judgments.
C) if-then statements.
D) objective descriptions of the way things are.
Answer: B
Diff: 1
18) Which of the following statements is an example of positive economic analysis?
A) The inflation rate is too high.
B) The government should worry less about inflation and more about unemployment.
C) If the government increases the rate of growth of the money supply, the inflation rate will
increase, ceteris paribus.
D) The elderly live on a fixed income, so the government has an obligation to keep inflation rates
low.
Answer: C
Diff: 2
71
19) Which of the following is a normative economic statement?

A) An increase in corporate income taxes will cause the unemployment rate to increase.
B) The costs of medical care are increasing faster than the incomes of U.S. citizens.
C) Teenage unemployment is over ten percent.
D) Teenage unemployment is too high.
Answer: D
Diff: 2
20) Which of the following is an example of a normative economic statement?
A) Lower income tax rates will generate greater income tax revenue to the government.
B) Income tax rates should be lower because that will increase government revenue.
C) Lower income tax rates yield a larger federal government deficit.
D) The federal budget deficit has increased every year for the last twenty years.
Answer: B
Diff: 2
21) Which of the following statements concerning the distinction between positive and
normative economics is true?
A) Positive statements are concerned with what is, while normative statements are concerned
with what someone thinks should be.
B) Positive statements are concerned with what people think, while normative statements are
concerned with what people do.
C) Positive statements are true while normative statements are false.
D) Positive statements are concerned with what is while normative statements are concerned
with what will be.
Answer: A
Diff: 2
22) Positive economic analysis is supposed to be
A) true.
B) free of value judgments.
C) just and fair.
D) moral and honest.
Answer: B
Diff: 1
72
23) It has been noted that when the price of a good increases, people purchase less of the good.
This is an example of
A) macroeconomic analysis.
B) irrational behavior.
C) normative economic analysis.
D) positive economic analysis.
Answer: D
Diff: 2
24) Normative economics is
A) analysis involving value judgments about economic policies; or a statement of "what ought to
be."
B) analysis that is strictly limited to making either purely descriptive statements or scientific
predictions.
C) analysis of the behavior of the economy as a whole.
D) decision making undertaken by households and business firms.
Answer: A
Diff: 2
25) Normative economic analysis involves
A) true statements of facts only.
B) testable hypotheses by scientists.
C) value judgments and opinions.
D) purely descriptive statements.
Answer: C
Diff: 1
26) Which of the following is an example of a positive statement?
A) It is too hot to go jogging.
B) Ceteris paribus, a teacher should award a higher grade if you study more hours for an
economics test.
C) When the price of an item increases, people respond by reducing their consumption of the
item.
D) The government should balance the budget.
Answer: C
Diff: 1
73
27) Which of the following is a statement with positive economic analysis?

A) Lower wages increase employment and reduce the unemployment rate.
B) Slower money growth reduces inflation.
C) A reduction in the size of the budget deficit will reduce interest rates.
D) all of the above
Answer: D
Diff: 2
28) Which of the following is NOT normative economic statement?
A) The minimum wage should be eliminated so unemployment can be reduced.
B) Increases in the minimum wage cause increases in unemployment.
C) The inflation rate should fall to increase individuals' well being.
D) Taxes on cigarettes should be increased to reduce smoking.
Answer: B
Diff: 2
29) Which of the following is an example of a positive economic statement?
A) The unemployment rate last month was 5.4 percent.
B) The unemployment rate last month was too high.
C) Because of the high unemployment rate last month the government should increase
government spending.
D) The unemployment rate should be measured differently because it doesn't include students
who can't find jobs.
Answer: A
Diff: 2
30) Normative economic analysis tends to
A) generate testable hypotheses.
B) include the way someone thinks things should be or ought to be.
C) involve descriptive statements.
D) lead to empirical testing of data.
Answer: B
Diff: 1
74
31) Which of the following statements is true regarding the textbook used in this course?
A) The textbook presents only economic theory, so no value judgments are involved in the text.
B) The textbook does not include normative statements.
C) The microeconomic section of the book includes only positive analysis while the
macroeconomic section includes normative analysis.
D) The selection of topics included in the book involves value judgments as well as economic
theory.
Answer: D
Diff: 2
32) Analysis that involves value judgments about economic policies is
C) microeconomics.
D) macroeconomics.
Answer: B
Diff: 2
33) Analysis that is limited to making either purely descriptive statements or scientific
predictions is
C) microeconomics.
D) macroeconomics.
Answer: A
Diff: 2
34) The term or phrase most likely to indicate a normative statement is
A) "ceteris paribus."
B) "factual." or "what is" statement.
C) "holding other things constant."
D) "should" or "ought to."
Answer: D
Diff: 1
75
35) Jane is currently developing a model to explain the national unemployment rate. This is an
example of
A) a microeconomic topic.
B) normative analysis.
C) positive analysis.
D) how people act in an irrational manner.
Answer: C
Diff: 1
36) How does the science of economics deal with the fact that we all have different values?
A) by assuming that values don't play a role in economic behavior
B) by seeking to discover the sources of different value systems
C) by using positive analysis
D) by surveying the public to see what the most common values are, and then incorporating
those as assumptions into their models
Answer: C
Diff: 3
37) Which of the following is a positive statement?
A) An unemployment rate of 5.8 percent is too high.
B) The unemployment rate is 5.8 percent.
C) The unemployment rate should be below 5.8 percent.
D) The unemployment rate should never be above 5.8 percent.
Answer: B
Diff: 1
38) Which of the following is NOT a positive statement?
A) The unemployment rate is 5.8 percent.
B) The inflation rate for 2002 was 2.3 percent.
C) The national debt is too high.
D) The federal government budget for 2004 is $2.2 trillion.
Answer: C
Diff: 1
76
39) The difference between positive statements and normative statements is that
A) a positive statement involves a value judgment and a normative statement is a statement of
fact.
B) a positive statement is a statement of fact and a normative statement involves value
judgments.
C) value judgments are made in normative statements but assumed in positive statements.
D) normative statements are provable while positive statements are not.
Answer: B
Diff: 2
40) Which one of the following is an example of a normative statement?
A) A digital camera costs more than a disposable camera.
B) Most digital cameras sold in the United States are imported from other countries.
C) A camera makes a good wedding gift.
D) More people will buy digital cameras as their prices decline.
Answer: C
Diff: 1
A) A vacation in Colorado is better than a vacation in Hawaii.
B) Hotels in Colorado are more expensive than are hotels in Hawaii.
C) The hotel vacancy rate in Hawaii will increase as airfares to Hawaii increase.
D) The busiest tourist month in Colorado is July.
Answer: A
Diff: 1
42) Which one of the following is an example of a positive statement?
A) Farmers need some type of government aid.
B) State governments should provide economic assistance to farmers.
C) The federal government should provide economic assistance to farmers.
D) The amount of financial assistance given to farmers is higher this year than it was 10 years
ago.
Answer: D
Diff: 1
77

A) Public school teachers are not paid enough.
B) The average public school teacher earns less than the average truck driver.
C) The average public school teacher earns more than the average truck driver.
D) Students in smaller classes perform better on standardized tests.
Answer: A
Diff: 1
44) Normative economics
A) is never studied at the undergraduate level.
B) involves value judgments.
C) is always objective.
D) cannot be applied to all economic problems.
Answer: B
Diff: 1
45) The President's statement that "to encourage economic growth, taxes should be cut,"
A) would be an example of a normative statement.
B) would be an example of a positive statement.
C) would be an example of a microeconomic statement.
D) would be a statement of mercantilist economic philosophy.
Answer: A
Diff: 1
46) The headline in the local paper today is "College tuition next fall will be raised by 3 percent."
This statement is an example of
B) a positive statement.
C) a macroeconomic statement.
D) ceteris paribus.
Answer: B
Diff: 1
78
47) Positive economics

A) always gives an optimistic spin to economic news.
B) is concerned with the economic policies that should be implemented.
C) is objective.
D) was not used by nineteenth century economists.
Answer: C
Diff: 1
A) Few auto mechanics are women.
B) Men and women should earn the same salary if they perform the same job.
C) Auto mechanics typically earned more than waitresses in the United States in 2004.
D) Most wait staff are women.
Answer: B
Diff: 1
49) Economics seeks to use only positive analysis to
A) provide a value-free analysis.
B) seek the best answer.
C) predict how people should act.
D) provide normative values.
Answer: A
Diff: 2
50) Which of the following is a positive economic statement?
A) We should strive to achieve full employment in the United States.
B) The President of the United States should promote stable prices in the United States.
C) If the price of eggs increases, the quantity demanded of bacon will fall.
D) We should try to eliminate poverty in the United States.
Answer: C
Diff: 1
79
51) Normative economic statements

A) are statements of "what ought to be."
B) are statements of "what is."
C) are statements that may be tested by referring to facts and data.
D) do not involve value judgments.
Answer: A
Diff: 1
A) If the government increases spending, unemployment will fall.
B) The government should increase spending during times of economic recession.
C) If banks create more money, unemployment will decrease.
D) If the price of gasoline rises, car pooling will increase.
Answer: B
Diff: 2
53) "The U.S. government should not use my tax dollars to subsidize people on welfare"
A) is a positive economic statement because it simply describes one person's opinion.
B) is a normative economic statement because it involves a value judgment about an economic
policy.
C) is a positive economic statement because it predicts that my tax dollars will go to welfare.
D) is a normative economic statement because it is a scientific fact.
Answer: B
Diff: 2
54) All of the following are positive statements EXCEPT
A) the President of the United States in 2008 was George W. Bush.
B) California is in the United States.
C) migratory birds fly south for the winter.
D) a dog is man's best friend.
Answer: D
Diff: 1
80
55) Positive analysis can be described as

A) the study of whether people respond to positive incentives.
B) the study of whether people respond to negative incentives.
C) a value-free approach to inquiry.
D) a study that is not tested empirically.
Answer: C
Diff: 1
56) A positive economic statement is one that
A) can be refuted.
B) is free of the ceteris paribus assumption.
C) is based on a value judgment.
D) asserts something about the role of moral behavior in building a strong economy.
Answer: A
Diff: 2
57) Which of the following is a positive statement?
A) We need to carefully protect our borders.
B) Hyperinflation is the most damaging thing that can occur in an economy.
C) When tax revenues are less than government spending there is a budget deficit.
D) Foreign aid should be reduced to help our budget deficit.
Answer: C
Diff: 2
58) Which of the following is a normative statement?
A) The Gross Domestic Product is the dollar value of all goods and services produced in a
country in a year.
B) Fiscal policy is determined by the Congress and the president.
C) Tax cuts ought to be enacted for the good of the economy.
D) Monetary policy is determined by the Federal Reserve System.
Answer: C
Diff: 2
81
59) "A positive economic statement is always true and a normative economic statement is always
false." Do you agree or disagree with this statement? Explain.
Answer: Disagree. A positive statement is one that is either descriptive or makes a prediction of
the type "if A, then B." A descriptive statement can be false. For example, the statement, "It is
raining today," may be either true or false. A prediction can also be false. A normative statement
cannot appeal to evidence. The statement, "It shouldn't rain today," cannot be evaluated as either
true or false by looking to see if is raining or not.
Diff: 2
1.7 Appendix A: Direct and Inverse Relationships
1) A relationship between two variables in which one variable increases at the same time as the
other decreases is called
A) nonlinear.
B) constant.
C) inverse.
D) direct.
Answer: C
Diff: 1
Topic: 1.7 Appendix A: Direct and Inverse Relationships
2) A direct relationship occurs when
A) the two variables being compared change in opposite directions, or when one goes up the
other goes down.
B) a change in one of the variables causes a change in the other variable in any direction.
C) the two variables being compared change in the same direction, or when one goes up the other
also goes up.
D) the two variables have no identifiable relationship with each other.
Answer: C
Diff: 2
82
3) If an increase in one variable causes a decrease in another variable, this is

A) a direct relationship.
B) a dependent relationship.
C) an independent relationship.
D) an inverse relationship.
Answer: D
Diff: 2
4) A relationship between two variables in which one variable increases at the same time that the
other increases is called
A) nonlinear.
B) constant.
C) inverse.
D) direct.
Answer: D
Diff: 1
5) When two variables have an inverse relationship, the slope is
A) negative.
B) positive.
C) infinity.
D) zero.
Answer: A
Diff: 1
83
6) In the above graphs, an inverse relationship is shown by

A) Graph A.
B) Graph B.
C) Graph C.
D) Graph D.
Answer: A
Diff: 2
7) In the above graphs a direct relationship is shown by
A) Graph A.
B) Graph B.
C) Graph C.
D) Graph D.
Answer: B
Diff: 2
8) When two variables have a direct relationship, the slope is
A) negative.
B) positive.
C) zero.
D) infinity.
Answer: B
Diff: 1
84
9) An inverse relationship will be graphed as

A) a line that is upward sloping.
B) a line that is downward sloping.
C) a loop.
D) a U-shaped curve.
Answer: B
Diff: 1
10) In an inverse relationship,
A) one variable rises while the other falls.
B) both variables rise together.
C) both variables fall together.
D) the two variables have nothing to do with each other.
Answer: A
Diff: 1
11) Which of the following is an example of an inverse relationship?
A) hours of study and test grade
B) calories eliminated from diet and weight loss
C) beers consumed while studying and test grade
D) amount of snowfall and profits of ski resorts
Answer: C
Diff: 1
1.8 Appendix A: Constructing a Graph
1) Consider the statement, "The number of beers consumed the night before a test affects the
grade." In this statement
A) beer is the dependent variable and test grade is the independent variable.
B) beer is the independent variable and test grade is the dependent variable.
C) both beer and grade are dependent variables.
D) both beer and grade are independent variables.
Answer: B
Diff: 2
Topic: 1.8 Appendix A: Constructing a Graph
85
2) The "paired observation" of (14, 6) means

A) x = 14, y = 6.
B) x = 6, y = 14.
C) x = any multiple of 14, y = any multiple of 6.
D) the origin is at 14 and 6.
Answer: A
Diff: 2
3) The "paired observation" of (-14, -6) means
A) x = -14, y = -6
B) x = -6, y = -14
C) that the distance between the two points will be 8.
D) the origin is at -14 and -6.
Answer: A
Diff: 2
4) The intersection of the x axis and the y axis is called the
A) "meeting point."
B) origin.
C) "zero" point.
D) corresponding point.
Answer: B
Diff: 1
1.9 Appendix A: Graphing Numbers in a Table
1) The relationship between beers consumed the night before an exam and test grade will be
graphed as
A) a line sloping down from upper right to lower left.
B) a line sloping down from upper left to lower right.
C) a circle.
D) a u-shaped curve.
Answer: B
Diff: 2
Topic: 1.9 Appendix A: Graphing Numbers in a Table
86
2) Suppose that on average there are five more car accidents for every extra inch of snowfall in a
certain region. If snowfall is graphed on the y axis and car accidents on the x axis, then if we
graph this relationship, the slope of the line will be
A) 25.
B) 5.
C) 1/5.
D) 1.
Answer: C
Diff: 2
3) If the slope of a curve is 1/5, we know that
A) the relationship is linear, and the line moves from lower left to upper right.
B) the relationship is non-linear, and the line moves from lower left to upper right.
C) the relationship is linear, and the line moves from upper left to lower right.
D) the relationship is non-linear, and the line moves from upper left to lower right.
Answer: A
Diff: 3
1.10 Appendix A: The Slope of a Line (A Linear Curve)
1) A negative slope
A) represents an inverse relationship, such as beers consumed and test score.
B) represents a direct relationship, such as snow fall and car accidents.
C) indicates that there is no relationship between two variables, such as women's wages and
likelihood of sunshine.
D) means that the line crosses below the x-axis.
Answer: A
Diff: 2
Topic: 1.10 Appendix A: The Slope of a Line (A Linear Curve)
2) The slope of a straight line
A) is the same at all points along that line.
B) cannot be defined.
C) changes from one point to the next on that line.
D) is always equal to zero.
Answer: A
Diff: 1
87
3) The slope of a nonlinear curve

A) is constant.
B) is always negative.
C) changes along the various points of the curve.
D) is always equal to 1.
Answer: C
Diff: 1
4) The slope of a nonlinear curve is ________ when the curve is rising, and ________ when the
curve is falling.
A) negative, positive
B) negative, negative
C) positive, negative
D) positive, positive
Answer: C
Diff: 1
5) If a straight line crosses the Y-axis at 5 and crosses the X-axis at 10, we can conclude that the
slope of the line is
A) positive.
B) negative.
C) zero.
D) infinity.
Answer: B
Diff: 2
6) The slope of a line is the
A) change in the values along the x-axis divided by the change in the values along the y-axis.
B) values on the x-axis divided by the values on the y-axis.
C) change in the values along the y-axis divided by the change in the values along the x-axis.
D) values on the y-axis divided by the values on the x-axis.
Answer: C
Diff: 2
88
7) Given a linear curve, the value on the y-axis changes from 100 to 120 when the value on the
x-axis changes from 20 to 10, then the slope of that curve is
A) -20.
B) +20.
C) -2.
D) +2.
Answer: C
Diff: 2
89

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Economics Today, 16e (Miller)

Chapter 1 The Nature of Economics

4) What is the purpose of knowing "the economic way of thinking"?

10) Economics is the study of

14) Economic resources are

18) Wants are

22) Economics is the study of how people make

26) Resources are

30) Which of the following is NOT a focus of the study of economics?

34) Macroeconomics is the study of

38) Macroeconomics deals with

42) The macroeconomist would most likely study

46) Which of the following would likely be studied in a macroeconomics course?

50) Microeconomics is concerned with the study of

54) Macroeconomics is concerned with studying the

58) Another word for "aggregate" is

62) All of the following are examples of macroeconomic problems EXCEPT

66) Which of the following is a characteristic or focus of economics?

70) Which of the following is a microeconomic concern?

74) Which of the following is a microeconomic topic?

78) The impact of an increase in the gasoline tax on SUV sales is

82) Aggregate measures are

86) Is inflation a macroeconomic or a microeconomic question? Why?

3) The issues that an economic system attempts to solve include:

7) Central planning is a key characteristic of which economic system?

11) The United States is best known as a

2) Economists assume that people are motivated by

18) Self-interest relates to

22) People behave rationally when they

26) The rationality assumption says that

34) Which of the following ways to recruit soldiers utilizes incentives?

38) Charitable donations to the Red Cross

45) Rational behavior for an economist means that individuals

56) Underlying economic theory is the idea that

8) Which of the following statements concerning economic models is FALSE?

12) An economic model should capture

26) An appropriate test of the effectiveness of an economic model is

41) Economic models are NOT used to

45) A good economic model

49) A model is used to explain economic behavior. Therefore,

53) "Ceteris paribus" means

57) Economic models relate to

64) The ceteris paribus assumption means

72) Economic models

76) Assumptions in models tend to make

84) What is meant by saying that economics is an empirical science?

88) "To be useful, a model must be completely realistic." Evaluate.

3) "If A occurs then B will follow" is a

7) Which of the following is a normative statement?

11) Which of the following statements is a positive economic statement?

15) Positive economic analysis is said to be

19) Which of the following is a normative economic statement?

27) Which of the following is a statement with positive economic analysis?

43) Which one of the following is an example of a normative statement?

47) Positive economics

51) Normative economic statements

55) Positive analysis can be described as

3) If an increase in one variable causes a decrease in another variable, this is

6) In the above graphs, an inverse relationship is shown by

9) An inverse relationship will be graphed as

2) The "paired observation" of (14, 6) means

3) The slope of a nonlinear curve

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